Amid months-long speculations that the Central Bank of Iran may be compelled to increase bank interest rates again to offset some of the effects of a depreciating national currency, a senior banker has proposed the revival of longer deposit contracts to replace potential interest rate hikes.
“I find it unlikely that increasing bank interest rates will be possible under the current circumstances because the resources and loan allocation conditions of the banks are not suitable for an interest rate hike,” Kourosh Parvizian, the head of the Association of Private Banks and Credit Institutions, told Fars News website.
“One of our proposals to the central bank was to bring bank deposit contracts with maturity periods of two and three years in order to better manage the resources of the banking system,” the official, who also heads the major private lender Parsian Bank, added on Monday.
At present, bank deposit contracts are defined as long-term (one year) or short-term (less than one year) as per a decision made about four years ago.
Since June, talks are circulating that the monetary regulator will be forced to raise the current legal ceiling of 15% for long-term deposit contracts to the previous level of 18% or higher. That, in turn, will automatically increase lending rates that are usually 3% higher than deposit rates, entailing more pressure for local businesses.
Many pundits and officials have protested a possible bank interest rate hike for this reason and due to potential inflationary effects. For now, CBI Governor Abdolnasser Hemmati has allowed banks to renew for one more month the one-year contracts they signed in September 2017 with deposit rates going higher than 15%.
On Monday, Parvizian also opined that people will welcome longer-term deposit contracts since many of them cannot operate in high-risk markets and prefer a safe place like a bank that will guarantee their returns.
“On the other hand, banks don’t have short-term expenses either since many businesses receive their working capital in 18-month cycles that do not match one-year deposits,” he said.
Parvizian also referred to potential deposit rates of longer-term contracts, saying not only their rates should not necessarily go higher than one-year contracts, but they can even go lower since the safety of return is what matters to the customer.
“A major predicted policy was long-term financing through the capital market and short-term financing through the banking system,” he explained, adding that the current conditions of the country do not allow that, necessitating longer-term deposit contracts.
